First, the Mooney brand and its related assets were acquired in 2013 by Zhengzhou-based real estate developer Meijing Group. While the company is still US-based, it is, in ownership at least, a Chinese company.

Second, the M10 will be primarily manufactured in China after it is certified by the FAA and, presumably, the Chinese authorities as well.

Third, the aircraft is ostensibly targeted at the long-nascent Chinese general aviation market. Boasting a unique diesel engine, the plane would be cheaper to fuel in China (where standard aviation fuel can cost up to four times its US price), and the use of diesel would give the plane a 500 mile range – critical in a market where civil airfields are still depressingly rare.

The folks at Mooney have a fine-looking aircraft, but it is a very long way from changing aviation in China.

The plane’s primary advantage – the cost of fuel – is the result of the relative immaturity of the general aviation. There is not a lot of demand for Avgas (as opposed to jet fuel) in the market, so little is made, and the product is sold at a premium. If suddenly there were thousands, or even hundreds, of private aircraft in China, the economics of Avgas production and distribution would begin to narrow the gap between the cost of diesel and avgas.

What is more, the primary challenge for general aviation in China (defined as all aviation other than military and scheduled commercial airlines) has little to do with the price of fuel. The biggest problem remains air. The Chinese Communist Party has placed control of China’s airspace over military rather than civilian authorities. For its own reasons, the PLA is parsimonious with airspace, and wresting control of a piece of the sky for private aviation has been a difficult battle.

Airports are another issue. China has just over 250 non-military airports for the entire country. By comparison, with a similar geographic area, the US has more than 5,000 airports, and Euorpe has 3,900. What is more, few of those airports have the facilities necessary to service general aviation aircraft.

Finally, any new aircraft would face a market filled with formidable competitors. Textron Aviation, owner of Cessna, Beechcraft, and Hawker, already has deep ties in the country and broad product lines more attuned with both the business aviation and training/education markets. And Cirrus Aircraft, with its reputable SR series, is now owned by China’s largest aircraft manufacturer. All of these players will see Mooney coming, as any sales are still years away.

Even with its new pedigree as a Chinese manufacturer, Mooney faces an unenviable uphill battle. China is a market that tends to favor giants over upstarts, even its own, and that applies double for aviation. Mooney would be better off finding a way to build the plane in China, but focus on markets where the local competition was not so well positioned to crush it.

As Air France and other developed-nation air carriers around the world put their venerable fleets of Boeing 747s out to pasture (or, more accurately, into storage at massive desert airfields,) one may come under the mistaken impression that the “the humpback Boeing” may be disappearing from the skies.

That probably won’t happen as soon as we think. While dozens of 747-400s sit unused around the world, China has been quietly buying up these still-very-usable aircraft for as little as $16 million apiece (they run $350 million new) and converting them to freighters to deliver high-value cargo from China to points around the world.

The video above shows an old Saudi Arabian Airlines 747-400 being converted by Israeli Aircraft Industries/Barak into a like-new freighter. IAI is not the only company doing this – there are probably half a dozen major, reputable companies around the world doing this work.

With state-supported airlines, a growing share of high-value manufactures, and a military very interested in building up China’s civilian airlift fleet, China could well become the citadel of the 747 in years to come.

English: Tesla Motors opened its showroom in Munich in September 2009. (Photo credit: Wikipedia)

Hutong WestFinishing the Table of Contents1200 hrs., 11 March 2015

So do you think Apple should take some of that massive cash pile and spend it on Tesla? Some shareholders apparently do. And if you did, you might have a point. Who better to finance the disruption of the automobile industry than the largest, most profitable company on the planet?

But for the rest of us, consider this sequence of events that I am betting would take place within 18 months of Apple closing the deal.

Day 1 – Apple buys Tesla

Day 30 – Elon Musk quits, citing creative differences, but attests to his continued faith in Tim Cook and Tesla’s future with Apple. Musk takes his cash hoard and shifts his attention to SpaceX.

Day 60 – Apple hints at major redesign of the sedan by Jony Ive. Tech and automotive media go into spasms of speculation.

Day 120 – Tim Cook takes the stage at the Detroit Auto Show to announce that Apple is dropping the Tesla name. From now on the marque will simply be “Apple.” He then unveils the redesigned sedan, which bears a striking resemblance to the Audi coupe in Will Smith’s “I, Robot.” Except, you know, it’s glossy white. The car will be called the Apple Phaeton, and it will be followed by the Apple Barchetta coupe, and the the Apple Combo crossover SUV.

Day 180 – Apple announces that due to unspecified issues in Fremont, after the first year they will be outsourcing all production to China.

Day 210 – At the Los Angeles Auto Show, Apple announces pricing for the Phaeton and Barchetta, 25% higher than the previous models. They also announce that they are shifting to a proprietary fast-charging system called ePlug. And with the presidents of Exxon-Mobil, Chevron-Texaco, BP, and Valero onstage, announces that all of these chains would begin installing ePlug fast charging systems across their North American units starting that day. Each company agreed to a seven year exclusive with ePlug.

Day 212 – In a class action suit, GM, Ford, and Toyota all sue Apple for violating Sherman Anti-Trust act in gaining a monopoly on electric charging at fueling stations.

Of course, as both a government-owned business and the national flag carrier, Air China doesn’t need to worry as much about empty coffers as, say, EasyJet or Southwest Airlines. So the cash issue is a bit of a red herring.

The Hong Kong Squeeze Theory

The Wall Street Journalpiece about it raises an interesting issue. As UBS analyst Damien Horth noted, Air China is most concerned in the near term about “promoting its base in Beijing as a major travel hub. ‘Anything [Air China] can do to reinforce the position of that hub is critical, by limiting competition from Hong Kong.'”

No conspiracy theorist or long-term China resident could resist the speculation Mr. Horth’s remarks seem designed to arouse. “Hmm,” one might think: “could it be that Air China wants to control Cathay Pacific in order to restrict its growth, and by extension the growth of Hong Kong International Airport as a regional or global hub?”

Living but a stone’s throw from Air China’s opulent new headquarters just west of Beijing Airport, not only would I not be surprised if this were so, I might even be inclined to be sympathetic.

Sadly, I doubt this is the case. Instead, I think Air China has wisely made other plans for Hong Kong.

The Second Hub Theory

First, Air China still sees the heart of its long-term opportunity as leadership in PRC domestic air travel, where demand looks set to grow for the foreseeable future. Armed with leadership at home, it can then fill planes to overseas destinations with Chinese who are starting to travel with increasing frequency.

As the Journal points out, Air China was rebuffed last year in its attempt to buy its way into a hub in Shanghai. The idea behind that was to either secure Shanghai as a second hub for itself, or deny it to a rival.

Unable to take on one of its domestic rivals directly, Air China is now pursuing the indirect approach, this time taking on not China Eastern in Shanghai, but China Southern. If Air China can lock down control of a Hong Kong hub either directly (by dominating the airport with its own flights) or indirectly (through its ownership/influence/control over Cathay), it effectively “flanks” China Southern with a south China hub for outbound international traffic.

And for such a large country, that is going to be essential. While Beijing makes for an excellent hub feeding into Europe, Russia, and North America, it does not make sense for over two-thirds of China’s population to fly through Beijing to get to the Middle East, Africa, South Asia, Southeast Asia, Australia, Hong Kong, Taiwan, and the South Pacific.

Other Fish

Air China is better off letting Cathay worry about Hong Kong for now. The flag carrier needs to turn its attention elsewhere, optimizing its domestic route structure to feed into its international hubs, improving the efficiency of its fleet and it operations, and continuing to improve service on the routes it has.

A partnership with Cathay leaves China free to concentrate on the areas that will make it the most money in the long run, while building the route system and the know-how to compete against global carriers. Even better, Cathay remains the competitive foil to sustain pressure on the other premium Asian carriers while Air China matures.

None of which is to say that at some point in the future, keeping Air China, Dragonair, and Cathay running as independent airlines will stop making sense. But for now, each of these three operations – and their attendant brands – are doing well in their own space.

Which is exactly why any concern about Air China putting the squeeze on Hong Kong is overblown. For now.

Many foreign analysts doubt that Western airlines will ever be prepared to buy Chinese aircraft. But, as in other fields, China is playing a long game.

Much of the debate about the ARJ-21 thus far has centered around two issues: first, whether the ARJ-21 will attract buyers beyond the Chinese airlines who are compelled to purchase it (and GE, who is making a pile selling engines for the jet); and second, whether China will ever develop a globally competitive civil aviation industry.

Both questions miss the point. What is most important about the ARJ-21 is the lessons it teaches us about the process China goes through to catch up with the rest of the world in technical, complex, high-value industries.

Watch Process, not Product

If you look at all of the technical sectors in which China has built commercially viable businesses, you can discern a clear process by which the nation’s industrial policy kick-starts these efforts. In the case of cars, computers, mobile phones, and now commercial jetliners, the pattern is dependably consistent. Let’s call it the Four C Model.

First, comes what I call the “capability” phase. the government typically announces a national project to build its own version of an technical product. It turns to a government research institute or a similar organization, which in turn pulls together the team from across the nation’s universities and enterprises. Eventually they manage to produce a one or more prototypes, but there is no real possibility of commercializing the product.

Upon review of the initial prototypes and the development process, typically a range of issues is identified that prevented the commercialization of the product. As a result, during the next “collaborate” phase, China sets up an enterprise to build the product using foreign designs, components, and know-how. The result is not quite commercially viable, and may only sell to local customers because of tariffs, tax-breaks, or other subsidies that make the local product appealing to local customers.

Next comes the “component” phase, when a local company creates its own design or modifies another, and many of the parts, but key, mission-critical components come from overseas. In this phase the product is adequate and by most measures comparable to foreign products, but with no track record only the most adventurous foreign customers are ready to trust the product.

Finally, all of the technical kinks are worked out, there are several Chinese companies involved in the effort, and with a demonstrable track record behind it, China is ready to go head-to-head with global companies. This is the “competitor” phase, and it usually marked by brisk sales and the beginnings of a true competitive advantage.

Not Quite a Competitor

In the case of the ARJ, China’s effort to build its own jetliner has reached the “component” phase, and it has taken 35 years to get this far.

In the early 1970s, China began a project to prove to the world it was capable of making its own jetliner. the result was the now almost-forgotten Shanghai Y-10, which was as close to a clone of the Boeing 707 that the nation could produce in the late 1970s. Two prototypes were produced. They flew in the early 1980s. China made its point. And the jets never saw commercial service: they were essentially flying monuments to China’s aspirations. This was the “capability” phase.

Not long after, China got involved in negotiations with McDonnell-Douglas Aircraft for a joint-venture to assemble their MD-80 class jets in Shanghai. The JV went through brutal political turbulence and costly delays, and in the end the venture sold only a fraction of the jets it had hoped. McDonnell-Douglas was sent packing, but China was left with an entire generation of aircraft engineers, a lot of very helpful tooling, and the groundwork to take the next step. Thus ended the “collaborate” phase.

After nearly a decade of thinking, planning, proposals, and counter-proposals, and even another shot at collaborating with other Asian aspirants, China launched the ARJ-21 (Asian Regional Jet – 21st Century) project. This is the “component” phase, and at this point China is serving as re-designer (the jet is basically a shortened MD-80, or DC-9, with a new wing design from Russia), project manager, and system integrator.

Tough Room

China’s aviation policy-makers and industrialists knew the ARJ-21 would be playing in the most competitive end of the civil aviation pool. The regional jet field is dominated by Canada’s Bombardier, with its CRJ series, and Brazil’s EMBRAER, with its ERJ series, both of whom have complete lines of aircraft, global technical support, and who built their business on solid reputations for making dependable aircraft.

Three very old names in the aviation industry, British Aerospace, Dornier, and Fairchild, have already been driven out of the aircraft manufacturing business after losing out to Bombardier and EMBRAER, and Boeing’s 717 was squeezed out of its market niche with a plane strikingly similar to the ARJ-21. Four other very old names in the aviation industry, Antonov, Tupolev, Sukhoi, and Mitsubishi are all getting ready to pounce on the ARJ-21’s markets with brand new regional jets of their own.

So there is not much hope for the ARJ-21 beyond China. And prospects inside of China are not that great, either.

Fat Planes Wanted

The idea behind a regional jet is that you have flights under two hours duration connecting cities under 1,800 kilometers or 1,100 miles apart where you cannot economically fill, say, a Boeing 737, or where the field might be a little short for a small jetliner.

In China, however, the problem is that we have a limited number of airports, a limited amount of airspace, and a whole lot of people who want to fly. There will be some market for regional jets, but in the medium to long term China needs larger jets that make the best possible use of the limited resources in Chinese aviation (i.e., concrete and airspace) to move the maximum number of passengers at the lowest possible cost.

Finally, let’s not forget that perhaps the most serious competitor to regional jets in China doesn’t even fly. China is in the early phases of a madness for high-speed intercity rail transport. The threat posed by trains as fast as Japan’s Shinkansen and France’s TGV is most serious to the shorter air routes served by the ARJ. As the price of jet fuel goes up (and, despite current trends, it surely will), that threat grows all the more critical.

Back to our Model

There are other issues, such as a total cost of ownership for the ARJ-21s that are going to be higher than carriers are being let to expect. With all factors in consideration, the ARJ-21 faces some roaring headwinds.

But again, what is important is not the plane itself, but where China’s jetliner manufacturing industry will be after the ARJ-21. And here is where it starts to get really interesting.

Just as the ARJ-21 goes into full production, Airbus will be completing its A320 assembly plant in Tianjin. Between the two, China will for the first time have two factories cranking out airliners. The benefits to the industry will be enormous. China will have created overnight a workforce of engineers, machinists, and all of the other specialties involved in aircraft assembly.

In short, by 2014, the groundwork will be in place for China to make the next jump, and the ARJ-21 team will have had five years learning what it takes to support an airliner in the field, sometimes even in the most challenging locations.

What is more, right about that time, Boeing and Airbus will be under pressure from their customers around the world to develop successors to their single-aisle jetliners in the 110-170 passenger range. Both have made it so far by updating and extending their 737 and A320 lines. Five years from now, that may not be enough.

At that point, the door will open for China to enter the fray with its own design, and they will have the benefit of being able to work with the world of suppliers and subcontractors – both in China and overseas – that Boeing and Airbus have helped create. And with Boeing and Airbus forced to contend with powerful unions determined to secure for their members a comfortable American or European middle-class lifestyle, China may well offer a nice cost advantage as well.

All things being equal, then, China may well be able to compete in the small airliner market by 2020.

A Lesson, not a Product

Again, though, this makes the ARJ-21 a stepping-stone, not the destination itself. As such, the success or failure of the ARJ-21 project cannot be measured solely on the basis of aircraft sold. Rather, it must be judged on its by-products, on the extent to which it prepares the nation’s aerospace industry to take the next, all-important step and become a global competitor.

Amid all of the focus the melamine milk crisis, the world seems to be on a hair trigger with regards to Chinese quality. One recent example is the commentary surrounding the crash last Thursday of Cessna’s new prototype light sport aircraft, the Cessna 162 SkyCatcher during certification testing southeast of Cessna’s HQ in Wichita, Kansas. (h/t to Plastic Pilot.)

Red Flag on the Flight Line

Cessna has designed the SkyCatcher to make aircraft ownership accessible to an entirely new economic bracket. The SkyCatcher’s suggested retail price is US$111,500. That sounds like a lot, but to put that into perspective, consider that Cessna’s next-least-expensive airplane, the Cessna 172 Skyhawk SP, starts at a suggested retail price that would buy two-and-a-half fully-loaded SkyCatchers. That’s a huge difference in the world of recreational aircraft.

To make such a price even possible, the company is also planning the revolutionary step of manufacturing the planes in China. This is naturally drawing some skeptical attention from the aviation community. There is an old saying, after all, that there are old pilots, and there are bold pilots, but there are very few old, bold pilots, and the aviation community tends to be somewhat conservative.

News of the crash sent the chatterati into a tizzy, with speculation leaning heavily toward the China connection as the problem. Never mind that the prototype was built right in the good old USA, that the test pilot was performing maneuvers to test the controllability of the aircraft at the time, and the probability that either pilot error, weather, or a previously unidentified design flaw could have been the cause. No, the automatic assumption is that the problem was Cessna’s decision to build the aircraft in China.

So blaming anyone or anything in China for the crash apparently has no basis in fact. But the matter brings up a couple of potential issues.

Where Does Your Airline Get Its Fix?

(Photo: G. Schlager, Lufthansa Technik AG)

As concerned as the world’s authorities are now about the tainted milk issue, there is heightened sensitivity around Chinese quality across all industries. With the exception of toys and food, thee is no industry more sensitive to defects than aviation. I don’t know about you, but simply putting the phrases “quality fade” and “aviation safety” in the same sentence is enough to get me reaching for the airsickness bag.

Over the last decade, A growing number of international airlines have elected to perform routine-but-labor-intensive maintenance, repairs, and overhauls (MRO, in the trade) in centers in China certified by the FAA and other international aviation regulators. Most of these are joint ventures with MRO companies or aviation engineering firms from overseas, including Swire’s HAECO from Hong Kong and Lufthansa Technik from Germany.

If quality concerns around China continue – and there is no reason to think they won’t – it will only be a matter of time before this becomes an issue for the airlines. United Airlines’ machinists already tried to make it one, but given that it was related to a pending closure of United’s San Francisco maintenance base, it got ignored. Let it come from a crusading reporter from a big name media outlet, however, and many international airlines are going to find themselves with a China quality challenge of their own.

Ay-Are-Jay What?

The other matter is China’s renascent aircraft manufacturing business. Depending on whose estimate you believe, China has invested somewhere between US$ 800 million and US$ 1.5 billion on developing the ARJ21 commuter jet, and has managed to sell only 5 outside of China to aircraft leasing firm GECAS, a unit of GE. (Note that another GE unit supplies the engines for the ARJ21 and has what I figure is around US$1.1 billion in orders for the engines, which gives GE an incentive to roll the log a bit.)

Whether or not you think the question is even fair, it will be asked, if it hasn’t already. And if I were an ACAC executive – or an aerospace policymaker – I’d be a mite tweaked. But it underscores that the fondest hopes of China’s leaders for a robust domestic aviation industry can ride on something as simple as the contents of a package of baby formula.

Why Change Happens

Many commentators whom I hold in high esteem, like David Dayton at Silk Road, are pessimistic that this crisis will incite change. I think it can, provided enough people in the other industries in China whose reputations have been tainted by association get tired of losing opportunities because of somebody else’s screwups.

China will get on the active quality bandwagon when it hurts too much to do otherwise, which means when enough politically powerful local industries like aerospace begin feeling the pinch of clients wary of “Chinese quality.”

BOOK: Nothing Like It In The World: The Men Who Built the Transcontinental Railroad 1863-1869 by Stephen E. Ambrose, New York, Simon & Schuster, August 29, 2000.

BOOK: Empire Express: Building the First Transcontinental Railroad by David Haward Bain, New York, Viking, November 1, 1999

With no other intention than pure escapism, about six weeks ago I finally pulled off of my shelves two unread books about the building of the first transcontinental railroad across the United States. I’ve finished Stephen Ambrose’s highly readable work, and I’m now deep into David Haward Bain’s well-written, far more scholarly tome on the subject. In retrospect, the timing could not have been better, as global coverage begins on the opening of the final 712 mile section of the Beijing-Lhasa railroad.

The parallels are compelling:

• The Pacific Railroad (as the transcontinental railway was called in the 1860s) was a dream almost as old as the American Republic, having been a matter of discussion for nearly 50 years before it was realized. Similarly, the Lhasa railway has been on and off of the national agenda in China for over 50 years.

• The political reasons given to justify the expenditure in both cases was “to tie the nation together” by linking a remote region with the rest of the country.

• The Pacific Railroad could never have been completed without Chinese help (in particular, the effort to get through the Sierra Nevada mountains of California.) Similarly, the Lhasa railway relied on western help to address some critical challenges.

I could go on, but you get the point.

More important, perhaps, is contrasting foreign coverage of the Lhasa link with the coverage given the Pacific Railway some 140 years ago.

Perhaps in the age of air travel we’ve all grown a bit bored by railroads, but I think that’s because in an age of air travel and truck transport, railroads seem a bit quaint. In regions like North America and Europe, with their wealthy economies and dense populations, freeways, autobahns, and discount airlines railroads seem relegated to hauling coal or commuters. (They aren’t, but that’s the subject of another post.)

What we lack, therefore, is an appreciation of two things: how hard this was to do, and what effect this will have on Xizang.

A Engineering Feat and a Human Achievement

Ambrose and Bain both make visceral the science, craft, and sheer physical effort it takes to build a railroad across a mountain range. You need to find an “alignment,” a course for the road that does not rise more than about 100 feet every mile, but that is as straight as possible because every foot of railroad in terrain like this costs a small fortune.

You then need to dig, chip, and blast the grade through cuts and tunnels through mountains of solid granite. You need to fill or bridge rivers, canyons, gulches, and even little dips and do it in a way that won’t be washed out by floods, avalanches, or made impassible by high mountain winds.

And if you think that’s easy in the 21st century, remember that you need to do all of this in some of the most remote territory on earth, hauling men, machines, material, and the food, energy, and fuel to keep all of them working up a narrow artery of steel.

Oh, yeah, and one other thing. You’ve got to do all of this at an altitude considered too uncomfortable or indeed unhealthy for a sleeping airline passenger, much less a manual laborer.

But with few exceptions (notably Rui Xia’s superb late-2005 Asia Times article) you’ll see very little credit given to China’s engineers and workers for accomplishing this task in the international media. That’s a shame, not only because these hardy souls deserve it, but because the failure to give such credit causes the Chinese and foreign engineers who know how tough it was to build the Lhasa road causes all of them to question the balance of the international media on Chinese topics. In addition, it allows observers to underestimate the innate capabilities of Chinese engineering in spite of the kind of big-ticket-project related shenanigans we’re used to hearing about in China.

The Great Wall Builders are back. All of us should be contemplating the implications.

Linking Lhasa

Joseph Kahn has put forth a yeoman’s effort covering the story from his chair in Beijing, as much as I’m sure he’d have rather been covering it from the train itself. It’s left him taking a more political take on the road, which is a shame. I won’t go into what he wrote – you should give him a read yourself.

Given the sheer volume of hyperbole from both proponents and opponents of the line, it is impossible to capture with any justice the essence of either position, much less debate it. But a few thoughts to contemplate as you weather the barrage of coverage.

Expecting a single rail line passing through a small part of a province larger (and less accessible) than Alaska to bring fundamental economic change to the region stretches the bounds of credulity. Certainly, those living it Lhasa and its environs will experience some quality of life improvements based solely on the fall in the cost to schlep goods up the hill. It also opens the region up to a class of tourist or traveler who cannot afford an air ticket.

For the line to deliver any significant economic benefit (or harm, depending on your point-of-view,) its Lhasa terminus must become the hub of a transportation and communications infrastructure that links all of the cities and villages of the region. That’s the sort of nitty-gritty investment that is difficult to justify when sitting in Beijing, but that will become necessary if the nation is truly serious about including the Xizang province on the benefits of the China’s economic development.

As to whether the road will Sinicize the local culture, that is a far trickier question that in the end is determined more by one’s political and ideological viewpoints than on anthropology. There are some who see Xizang as the Shangri-la of James Hilton’s novel Lost Horizon and thus see any intrusion of modernity as the functional equivalent of genocide. Fair enough.

Yet in no small part, the matter remains in the hands of the locals themsleves. It is instructive to note that in the face of globalization we live in a world where a wide range of distinct cultures and ethnicities have survived or even flourished.

For what destroys cultures is not the coming of railroads, but the departure of relevance. History demonstrates that a culture that is deeply relevant to those who treasure it will survive. As long as a culture remains meaningful, assimilation will be held at bay.

(None of this, of course, is likely to mollify someone (like that deep political thinker Richard Gere) who maintains a canonical belief in the value of turning the Xizang province into an isolated mountain theocracy. For those folks, I’d suggest that a review of the histories and status of Nepal and Bhutan serve as good examples of the direction such an experiment might take. They invite pondering.)

On to India

One last thought about the railroad. Throughout history, railroads have also served to pierce and bridge borders between nations. In my view, the High Road to Lhasa is half a road that will accomplish its greatest historic purpose when it can form the bridge between Delhi and Beijing.

Starbucks Pacific Place
Where people are to caffeine like dolphins are to anchovies1355 hrs.

Longtime readers of this blog know that I am a longstanding Boeing partisan. Apart from having flown on just about every model of Boeing jet ever made (save the military ones), they were an important customer for my dad when he was an aerospace subcontractor in the 1960s and 1970s, and I’ve always admired them for their endurance and the core role they have played in the creation and growth of the aviation and space industries.

Things Are Getting Better

The last few years have been hard on us BA fanboys, watching Airbus emerge from a niche player to a real competitor to a contestant with Boeing for the leadership of the business, and standing by as Boeing proposed then withdrew a sequence of interesting commercial aircraft that didn’t make it beyond the drawing boards.

On the upside, Boeing has significantly improved its internal processes, created the economical 787 and an updated 747 just in time to catch $150/barrel oil, and has slowed (if not ceased) developing a 737 successor because it still has a huge backlog in 737 orders, all as China and the rest of Asia discover the wonders of air travel and start expanding their fleets.

The story that emerges from this study reveals how the acquisition was skewed in favor of certain helicopters from the very beginning by lawmakers and Pentagon officials, regardless of the requirements set forth by the Air Force’s own CSAR experts.

If true, Boeing is going to take some heat, and rightfully so. Nothing comes before passenger safety in commercial aviation, and nothing should come before the needs of the people in uniform in defense procurement.

But if these charges have some value, I would hope that the “lawmakers and Pentagon officials” involved in the process get skewered at the same time.

We will learn more about the veracity of these allegations soon, but it does not take someone imaginative to think that at the very least hearings are in the offing. Congressional and Defense Department Inspector General reviews are apparently already under way.

China and the Corporate Social Contract

This lends some perspective to the challenges businesses face in China. Collusion between the regulators and the regulated to distort what should otherwise be clear commercial and technological choices is by no means unique to the PRC. It also underscores that simply pointing to the competition and saying “but everybody does it” is morally bankrupt.

There are foreign-invested companies in China who seek to do good via acts of philanthropy or corporate social responsibility. The reaction from multinational enterprises in the wake of the Sichuan earthquakes has been huge, rapid, heartfelt, and highly commendable.

But one has to question the value of corporate community largesse when it is but a fig-leaf on a company’s failure to operate by its implied social contract, which begins with its responsibility to “first, do no harm.”

A number of government officials in China have publicly reacted to the queries of enterprises and CSR consultants about what civic acts of kindness are most appropriate in China by noting that CSR misses the point. The first and most important obligation of companies in China is to hire lots of people, pay them well, and pay their taxes, all while behaving in a way that benefits society rather than damages it.

Simply put, if we seek a more open, more transparent China, our obligation as foreign enterprises is to lead the way. Don’t come to Rome and do as the Romans. It may demand some sacrifices. It may mean you lose some big contracts. But in the end, it is better both for your company and for China.

What Happens in Seattle Doesn’t Stay in Seattle

Boeing may be completely innocent of the allegations covered in the story in DTI. As a Boeing fan, I hope so. (It is worth pointing out, in the spirit of fairness, that Airbus parent EADS has come under scrutiny in Europe for a series of alleged offenses, most recently for alleged stock trading improprieties on the part of senior executives.)

But if it is not, company executives must recognize that its modus operandi in its home country will affect the way it is perceived overseas. Eventually its conduct in China would come under scrutiny, by authorities either in China or elsewhere: surely, the thinking will go, a company that engages in improper collusion with government officials in its own country would feel free to do so elsewhere, right?

Perceptions matter. In a country that will need over 2,000 commercial aircraft in the next two decades, Boeing cannot afford such headaches. The company needs to do everything possible to clear up the matter of CSAR helicopters as soon as possible, lest it damage its prospects at home and abroad.

The death of Aloha Airlines can be used as an allegory for many things, but the lesson I take from it is that we as consumers need to rethink the role we play in the world.

It’s all fine and good to say “hey, I’m going to go over here and buy stuff because it is cheaper.” That’s the way we’ve been taught, and for many of us the need to save money is a matter of life and death.

But a large and growing number of consumers around the world aren’t going for “everyday low prices” because it means the difference between eating and not eating, or between having new clothes and going naked. For many, the issue is a matter of being able to buy what we need, and being able to buy a whole lot of things that we don’t really need.

When we were in Honolulu a month ago, we wandered over to the Wal-Mart behindAla Moana Center, about two kilometers from our hotel in Waikiki. Prices were, frankly, really low, and when you walk into a place where decent quality is available at an irresistible price, a little gland in the back of your head fires and suddenly you are filling the cart with a ton of stuff that you don’t really need. Think impulse buying on a grand scale that continues right up to the checkout line.

The Party Secretary then did a triage on the cart, and we wound up “restocking” a significant chunk of the items that we had grabbed that we did not have on our list when we walked in the store. But we still bought stuff that frankly, we didn’t need.

And that is the upside to everyday low prices. We buy stuff we don’t need because it is cheap, and we not only institute the Wal-Mart Effect, we also bring about unintended consequences in the form of waste, environmental damage, questionable labor practices, and businesses of all types driven into hardship, bankruptcy, or dissolution.

So long, and thanks for the trips

And such was the case with Aloha Airlines. People saw the near term benefit of $29 interisland airfares that on the U.S. mainland would have undercut Southwest airlines by 65%. They ignored the long-term problem of destroying a business upon which much of the Hawaiian economy depends. And they were warned.

Oh, sure, there are still plenty of planes flying around Hawaii, but they are smaller (meaning more flights to carry the same number of people) and have no belly space (meaning the island lost critical cargo capacity to support not only its businesses, but that would drive up prices on everyday goods to everyone in the islands.)

Time for Consumerism 2.0?

And service quality will decline. How many Californians old enough to remember the days of Pacific Southwest Airlines and AirCal would love to have those two airlines back, instead of USAir and United Shuttle? And how many of us would be willing to pay an extra $30 on a round-trip to have it?

I’ve always been something of a Milton Friedman laissez-faire capitalist. I am all in favor of creative destruction wreaked by the market.

But I’m starting to realize that when we enable creative destruction, we have to use a little more foresight and understand exactly what it is we are destroying. The hidden hand will not ensure that creative destruction will not destroy something worth saving – we will, as consumers.

I consider myself something of an amateur military historian, so it is particularly vexing to see a chunk of the PLA in action in Sichuan and have absolutely no idea what I’m looking at. That is even more embarrassing when you consider that my wife is a PLA brat and both of my in-laws are retired senior officers.

One person I mentioned this to remarked that they had not realized that U.S. assistance to China after the earthquake included helicopters. In truth, it didn’t. The planeloads of supplies and equipment delivered by the C-17s of the US Air Force included a lot of gear, even a fully-equipped urban search and rescue vehicle courtesy of FEMA and the Los Angeles County Fire Department. But no helicopters.

The Black Hawks – identical in many respects to those flown by the US military around the world – are a relic the 1980s, a time when it was politically correct to see the PLA and the US armed forces as potential allies. Despite consistent efforts on the part of Sikorsky, its parent United Technologies, and others, further sales have been politically impossible since 1989.

I am among those who believe that the calculus of global security changed significantly on September 11, 2001, and that in the kinds of non-traditional conflicts that look set to define military operations in the 21st century, the U.S. (as traditionally strong maritime power) and China (as a traditionally land power) are natural allies. It simply requires both sides to move beyond their doctrinal beliefs that the most likely next enemy is the big kid on the other side of the pond.

But I am in the minority, and so the Chinese Black Hawks will be departing the skies soon as their airframes reach the end of their effective lives and they are replaced by comparable (albeit larger) Russian-designed Mil Mi-17s produced in China under license.

In the meantime, it is somehow gratifying to watch them at work, saving lives on hillsides, valleys, and floodplains across the earthquake zone.

The normally astute (and often erudite) BusinessWeek falters a tad in analyzing the value of the coming wave of airline mergers in the United States.

The question BW asks is almost the right one – it wonders if the creation of a small number of American Megacarriers – Northwest/Delta, United/Continental, and American/player-to-be-named-later – will be enough to fend of European competition. The large U.S. carriers – with the sole exception of Southwest, a huge, well-run discount domestic-only airline – lose money on domestic service, making it up only on international passengers and freight. European carriers are, naturally stronger than US carriers in this space.

Asian Airlines are not Chopped Liver

Not a bad question. I suggest there are two others:

1. Given that there are only two airline models that seem to make money (low-frills and high-efficiency discount, or full-service, long-haul international), how is creating larger airlines that do neither of those very well going to make the U.S. industry any stronger? Nobody seems to have picked up the ugly reality that combining two mediocre airlines does not make the resulting company better – just bigger. Opportunities for economies of scale aside, this will still not solve the long-term problem: with the sole exceptions of Southwest and possibly JetBlue, U.S. airlines are operating on an obsolete business model.

and

2. If you think the British Airways, Lufthansa, and Air France/KLM are such a threat, have you ever paused to consider that Singapore Airlines, Cathay Pacific, and ANA would tear even bigger holes into what have become U.S. carriers’ most profitable markets – the trans-Pacific trade? It it particularly surprising that BW seems to dismiss the Asian carriers completely out of hand. With the sole exception of Virgin Atlantic, I cannot think of a single European carrier that approaches the quality of service, youth of fleet, and profitability of Asia’s leading airlines.

Don’t Follow The Americans – At Least Not THOSE Americans

All of this is instructive for China’s airline industry. As Air China pursues ownership of China Eastern, it heeds my second question while ignoring my first. Yes, it would probably be bad for Air China to stand by and let Singapore Airlines get its nose under the proverbial tent. Apart from that, however, it will simply create a larger, less nimble, less efficient carrier right at the time when the Chinese airline industry needs to rethink its structure.

China would do itself an injustice by learning the wrong lessons from all of the noise around M&A activity in America, and would do better by looking around the world for airlines that work brilliantly.

Lobby of the China World Hotel, Beijing
Surrounded by the Chindians
1439 hrs.

It’s getting to the point where you can’t go a day without hearing another recycling story. This pictorial essay on CNET today walks us through the recycling of airliners that have exceeded their economical service life.

(The whole concept of “economical service life” is, of course, highly relative. I think Aloha Airlines is flying 737-200s that are nearly 40 years old, while much younger aircraft have already gone through the shredder.)

The U.S. leads in this field because a) there are lots of large surplus airports in relatively remote areas, and b) the country has a highly developed recycling industry, and c) the costs of getting chunks of old planes to said recycling facilities – and getting recycled material to customers – is still low.

Let’s see: South Asia recycles ships. America recycles planes. What about China going into the business of recycling railroad rolling stock?

Anyway, what is interesting is that products made from recycled materials are now no longer just paper and beer cans. There are companies coming up with ways to use recycled wood, rubber, and even carbon fiber composites. The green/sustainability direction the world economy is taking has created new incentives for the recycling business to invest in new technologies.

If recycling is a growing business, one that is ready to pay for innovations, it is clearly another direction in which China could consider investing its “independent innovation” efforts.

After a month’s physical holiday and a month’s writing holiday – in succession, not in parallel – the issues surrounding air travel remain fresh in the mind. So it was with great interest that I read cNet’sreport noting that the International Air Transport Association (IATA) was confirming that it would meet its June 1, 2008 deadline to eliminate paper tickets everywhere in the world, completing a switch to e-tickets.

Here’s the kicker: China will be the first country to completely switch over.

This makes a lot of sense. Chinese airlines need all of the help they can get: constant price wars have driven profits in Chinese air travel into the sewer. $9 per ticket may not sound like much, but I’m sure the airlines of the PRC will take it. China Eastern Airlines, for example, lost US$365 million last year on 35.04 million passenger journeys. In other words, it could eliminate $315 million of that loss. It would have nearly doubled Air China’s profit for the year.

Needless to say, that’s significant. The question is, how else can this technology be applied in the industry to either improve efficiency or make flying more convenient?

Today, E. Tomorrow M

The systems that were the toughest to put into place for e-ticketing in China were reimbursement policies and ways of handling travel agents and ticketing offices that were, er, technology-deficient. Stunning as it is to believe, there is actually still an embarrassingly large number of places to buy air tickets in China that don’t have computers or printers. No single solution appears ready to bridge this technology gap.

What would go a long way, however, would be a system that would send the e-ticket information directly to a mobile handset from a central office. I have no hard data, but apocrypha and experience suggests that the vast number of airline passengers in China are shlepping cell phones. All that would need to happen to make this system work right now would be to whittle down the information so it would fit into 1 or 2 SMS messages.

This way, a travel agent without a computer could call a central office with the necessary information, and that office could generate the m-ticket and send it to the customer’s mobile. There would be all kinds of other benefits as well, including the ability to buy a ticket without having to set foot in a ticket agency (or, indeed, buy it as you drove up to the airport.) In other words, it would go a long way toward making air travel more convenient.

eBoardingPass

The mobile handset is going to be the key to the airlines’ next step as well: the eBoardingPass. IATA is helping to work out the kinks in a uniform system to allow passengers to print their boarding passes at home, using a unique barcode, with which some airlines are experimenting already. At the same time, IATA is pushing self check-in systems that have been installed in some two dozen airports around the world.

Combine the two, and self check-in with the mobile handset, with the airline sending an MMS with the bar code and some basic information would be a logical next development step for China’s busy airlines and overcrowded airports.

At least it would eliminate the problem of a dozen people cutting into the check-in queue at the airport.

About six weeks ago the U.S. Secretary of Transportation showed up in China suggesting that an open skies agreement between the U.S. and China would happen by year end.

We said then – and say now – that hoping for open skies with China in the foreseeable future is at best an existential exercise, and at worst it is self-delusion.

Wu Yi’s trip to the US to talk to her old pal Hank Paulson, while producing precious little, did manage to land an agreement to significantly increase the number of flights between the U.S. and China over the next year or so.

What nobody has caught yet is that this basically ends the whole open skies idea. It’s dead, folks.

Before you don the sackcloth, though, recognize that what Paulson and Wu agreed upon is actually all we can get rightnow. If we had started on SecTrans Mary Peters’ path, we would have been talking our faces blue trying for a home run when all we needed was a single.